Court Holds That A Stockholder of A Canadian Corporation Failed to Demonstrate Specific Jurisdiction Sufficient to Challenge a Merger and Acquisition

Obtaining jurisdiction over a corporation that is
incorporated and headquartered outside of the state can be difficult. A
plaintiff must plead and prove that the corporation purposefully availed itself
of the resources of the state for a court to exercise personal jurisdiction
over the defendants. The failure to do so, as in Poms v. Dominion Diamond Corp., Index No. 655733/2017, 2019 NY Slip
Op 31364(U) (Sup. Ct. N.Y. County May 15, 2019) (here), will
result in dismissal of the action.

Poms v. Dominion
Diamond Corp.

Background

Poms was a
putative class action brought by Nadav Poms (“POMS”), on his own behalf and on
behalf of the common stock holders of Dominion Diamond Corporation (“Dominion”
or the “Company”), for negligent misrepresentation, breach of fiduciary duty
and quasi-appraisal in connection with the proposed acquisition of Dominion by
the Washington Companies (the “Proposed Transaction”).

On July 15, 2017, Dominion’s Board of Directors approved a
definitive arrangement agreement (the “Arrangement Agreement”) with Northwest
Acquisitions ULC, an affiliate of the Washington Companies, pursuant to which
each share of Dominion’s common stock would be converted into the right to
receive $14.25 per share in cash. To enable Dominion’s stockholders to vote in
favor of the Proposed Transaction, Dominion’s Board authorized the filing of an
Information Circular (the “Circular”) with the Securities and Exchange
Commission. The Circular was also mailed to Dominion’s shareholders.

Poms alleged that the Circular violated New York and
Canadian law because it contained incomplete and materially misleading
information regarding: (i) the process leading to the Proposed Transaction;
(ii) the financial analyses conducted by Dominion’s financial advisors, TD
Securities Inc. (“TD Securities”) and Morgan Stanley Canada Limited (“Morgan
Stanley”), in connection with the Proposed Transaction; and (iii) the
projections relied upon by TD Securities and Morgan Stanley in performing their
valuation analyses.

Defendants argued that because Dominion is a “foreign
private issuer’ under the U.S. Securities laws, it was exempt from complying
with Section 14(a) of the Securities Exchange Act of 1934, which concerns an
issuer’s obligations to file a proxy statement in connection with a proposed
merger or acquisition and the contents thereof. Defendants further maintained
that Dominion was required to follow the specific proxy rules applicable under
the Canada Business Corporations Act (“CBCA”) and the applicable Canadian
Securities law. According to Defendants, Dominion provided all required
information required by the applicable Canadian law about the Proposed
Transaction.

Pursuant to the CBCA, a hearing was held before the Ontario
Superior Court of Justice (the “Ontario Court”) regarding the merger. Poms did
not raise any objection or oppose the merger in Canada, but instead commenced
the New York action.

The Dominion shareholders voted in favor of the transaction
and the Ontario Court entered a final order approving the transaction as “fair
and reasonable.”

At the final hearing on September 22, 2017, the Ontario
Court noted that “no Dominion shareholders have delivered responding materials
to indicate an intention to oppose court approval of the arrangement, as
permitted by paragraphs 26 and 27 of the interim order” and that “Mr. Poms has,
through counsel advised that he does not oppose the order sought, but he
intends to pursue the litigation that he commenced in the State of New York for
damages, and if the State of New York is later found to be forum non-convenien[s],
that he intends to pursue his claim for damages in Ontario. Mr. Poms has not
exercised rights as a dissenting shareholder.”

After the Ontario Court issued its final order, Poms amended
his complaint in the New York action. Defendants moved to dismiss the amended
compliant on several grounds: (i) the Court lacked either general or specific
personal jurisdiction over either Dominion or the Director Defendants; (ii)
Plaintiff’s claims concerning the Circular described a Canadian transaction
with no connection to New York and should be dismissed on the grounds of forum
non-conveniens; (iii) international comity, res judicata or collateral estoppel
applied because the Ontario Court had already ruled that the transaction was “fair
and reasonable”; (iv) the Securities Litigation Uniform Standards Act of 1998
precluded state law claims seeking damages on behalf of a class that alleged
misrepresentations or omissions of material facts in connection with the
purchase or sale of securities listed on a national exchange; (v) Plaintiff’s
claim for negligent misrepresentation failed to state a claim; and (vi)
Plaintiff’s claim for ‘quasi appraisal’ failed because quasi-appraisal is a
remedy rather than a cause of action and Poms failed to advance any underlying cause
of action that provided a basis for a quasi-appraisal remedy.

The Court granted the motion.

The Court’s Decision

In granting the motion, the Court addressed the first basis
for dismissal – the court lacked general and specific personal jurisdiction.

As to general jurisdiction, the Court held that it did not
possess jurisdiction over the Defendants because they were not at home in the
state. In this regard, the Court observed: “Dominion is a Canadian corporation with
its head and principal place of business in Calgary, Canada. Its registered
office is located in Toronto, Canada and it does not conduct any business in
New York. The Directors Defendants reside in Canada and/or the United Kingdom
and have no connection to New York.” Slip Op. at *5, n.3. Moreover, Poms did
“not assert any basis for New York to exercise general jurisdiction over
Defendants….” Id.

Regarding specific jurisdiction, the Court held that it did
not have such jurisdiction. Specifically, the Court held that under CPLR
302(a)(l), there was no transaction within the state and no relationship between
the transaction at issue and the claims asserted sufficient to exercise
jurisdiction over the Defendants. Coast
to Coast Energy, Inc. v. Gasarch, 149 A.D.3d 485, 486 (1st Dept. 2017) (internal
citation and quotation marks omitted).

The Court rejected Poms’ argument that it had jurisdiction
over the Defendants because Dominion’s common stock was traded on the New York
Stock Exchange and each of the Director Defendants had sufficient contacts with
New York as a director/officer of a company whose common stock was traded on
the New York Stock Exchange. Slip Op. at *5. The Court held that the mere
listing of shares on the New York Stock Exchange does not confer jurisdiction
over out-of-state defendants with no other contacts within the state: “However,
it has been long held that a corporation is not doing business in New York for
the purposes of conferring jurisdiction merely because its shares are listed on
a New York Stock Exchange.” Id. at *6
(citations omitted).

Next, the Court rejected Poms’ argument that the Court
possessed jurisdiction over the Defendants because the Arrangement Agreement selected
New York as the forum in which to litigate claims relating to the debt
financing of the Proposed Transaction. Id.
The Court explained that Poms overstated the reach of the forum selection
clause in the agreement. In fact, noted the Court, under the agreement, “only [claims] related to debt-financing
source and nothing more” could be litigated in New York. (Orig’l emphasis.)
Thus, “[b]ecause debt financing is not at all related to the causes of action
alleged by Poms – which concern[ed] the sufficiency and accuracy of disclosures
made in connection with the Proposed Transaction, Poms ha[d] not shown a
substantial relationship between the debt financing and the cause of action
pled to confer jurisdiction over the Defendants pursuant to the forum selection
clause.” Id. at **6-7.

The Court also rejected Poms’ argument that the Court had
jurisdiction over the Defendants because the proxy solicitation firm (Kingsdale
Advisors, a Canadian proxy solicitation agent) hired to solicit proxies had an
office in New York. Id. at *7. “The
fact that Defendants retained a Canadian proxy solicitation agent, which has an
office in New York is not sufficient, in and of itself, to show that Defendants
have subjected themselves to jurisdiction here.” Id. The Court explained that “Poms fail[ed] to plead facts
sufficient to demonstrate that simply by appointing Kingsdale Advisors as the
proxy solicitation agents, Defendants transacted business in New York.” Id. “In addition,” said the Court, “Poms
ha[d] failed to plead facts to show that his claims arose out of the
appointment of a proxy solicitation agent.” Id.

Finally, the Court rejected Poms’ argument “that New York
courts may exercise specific jurisdiction [in the action] because the
Defendants purposefully availed themselves of the resources of New York by retaining
Paul Weiss, a law firm headquartered in New York, as their legal counsel in connection
with the Proposed Transaction.” In doing so, the Court explained that
“Defendants here concluded the Arrangement Agreement in Canada with no
connection to New York. Although the Defendants consulted Paul Weiss’s Toronto
and New York offices, including some New York based attorneys, the center of
gravity for the Proposed Transaction was in Canada with a very remote, if any,
contact in New York.” Id. at **8-9.

“Moreover,” observed the Court, “a foreign entity hiring a
law firm, which has a presence in New York, but without a substantial connection
between the law firm’s engagement and the subject matter of the litigation, has
been held an insufficient basis to confer New York jurisdiction over the
foreign entity.” Id. at *9 (citations
omitted).

The Court found confirmation in Bristol-Meyers Squibb Co. v. Supreior Court of California, 137
S.Ct. 1773 (2017), in which the Supreme Court held that “[i]n order for a court
to exercise specific jurisdiction over a claim, there must be an affiliation
between the forum and the underlying controversy, principally, an activity or
an occurrence that takes place in the forum State.” Id. at 1781 (internal quotation marks and brackets in original
omitted), citing Goodyear Dunlop Tires
Operations, S.A. v. Brown, 131 S.Ct. 2846 (2011). “When there is no such
connection, specific jurisdiction is lacking regardless of the extent of a
defendant’s unconnected activities in the State.” Id. at 1781.

In light of the foregoing, the Court held that “the fact
that Defendants consulted attorneys who have an office in New York about a
Canadian Proposed Transaction (and some New York based attorneys may have even
been consulted about the Canadian Proposed Transaction) without more, does not
supply the required link between Defendants New York presence and the subject matter
of the litigation.” Slip Op. at *10.

In sum, the Court found that Poms did nothing more than try
to “manufacture specific jurisdiction” through “a few, detached connections
between Defendants and New York.” Id.

Instead Poms lists a few, detached connections between Defendants and New York in an attempt to manufacture specific jurisdiction. These connections, however, are not substantially related to his claim – that disclosures concerning the proposed acquisition in Canada of a Canadian company by an affiliate of a Montana company were inadequate and/or misleading. Poms list of unconnected relationships between New York and his claims concerning the Proposed Transaction in Canada are at best tangential and insufficient to show the required “affiliation between the forum and the underlying controversy” for New York to exert specific jurisdiction over this proposed class action litigation.

Id., citing Bristol-Meyers
Squibb, 137 S.Ct. at 1781.

Takeaway

Poms is a good
example of a court looking at the totality of the contacts with the state to
determine whether a defendant has “on his or her own initiative project[ed]
himself of herself into th[e] state to engage in a sustained and substantial
transaction of business.” Berkshire
Capital Group, LLC v. Palmet Ventures, LLC, 307 Fed. App’x. 479, 481 (2d
Cir.2008) (Internal quotations and citation omitted)). Thus, where, as in Poms, the transaction occurred “entirely
outside of New York” “[t]he mere fact that [the Defendants] engaged in some
contact with a [non-party in] New York does not mean that [the Defendants]
transacted business in New York.” Id.

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